Turning to Your Best Customers

For many small, entrepreneurial retailers, the post-holiday period has gone from difficult to frightening. Coming off of an extremely weak holiday selling season, which has left them behind the cash eight-ball, and facing gloom-and-doom headlines, they now find themselves staring at a sea of clearance merchandise with few customers coming through the doors, regardless of the discounts they're offering.

So how can they clear this inventory out and generate much needed cash, before it backs all the way up into the spring?

As urgent as the moment has become, there's also a real fear of putting the whole store on sale for 80 percent off (which might not even drive more traffic through the door) and doing serious harm to the very integrity of the store itself. How would we ever get them to pay full price again?

Successful small retailers have long known that the very best marketing involves personal referrals and recommendations that their best customers give to their friends. These retailers have historically gone to great lengths to foster and nurture these customers, because they were the route to the next tier of customers. They have done this not with price promotions, but with trunk shows, private viewings, and other special events. They have attempted to extend the warm, gracious, and engaging atmosphere of these events to their sales floors in general, trying to create a comfortable and inviting shopping experience. Long before there ever were loyalty programs, this was their intuitive approach to building enduring first-name relationships with their best customers.

I've been working with several clients on leveraging these relationships to clear out the backlog of seasonal inventory while protecting the long-term equity of the store itself. Without question, it's a tough balancing act. Still, what we've come up with is worth considering if you find yourself in this situation as well.

Rather than resorting to 75 or 80 percent off, as you might need to do if you took a straight clearance approach, or adopt a BOGO (buy one, get one) structure that leaves you essentially with a similar level of discounting, here's how we've approached it.

First, we started by leaving discounts where they've historically been for second markdowns -- usually at 50 percent off. Then we built a customer referral program on top of those discounts. Working from the existing customer e-mail lists, we've sent out emails offering these customers a gift certificate if they bring the e-mail and a friend not on our e-mail list, and that friend spends at least a given amount and gives us his or her e-mail address. Then, we offer the same opportunity to the new customer.

We've been working with a two-to-one ratio between the minimum amount that has to be spent and the value of the gift certificate. For example, if the minimum amount that had to be spent was set at $100, then the gift certificate would be $50.

This works for my clients for a number of reasons. First, we're giving their best customers an incentive to come in and see what's on sale. In an environment of weak traffic counts, these are the customers who are predisposed to come back in. These are the customers who are typically the easiest to convert, and have the highest average transaction and units per transaction.

Second, the friend is probably going to spend more than the minimum amount, and the current customer will likely make a purchase as well, whether she uses the gift certificate at that time or not. So, we're going to move through those clearance units, and probably at a cumulative discount of less than 75%.

Third, we're adding new names to the e-mail list. These are the customers we want to pursue over the coming months, to welcome and embrace. Whether business remains difficult, or the spring starts to show a rebound, these new customers are needed to expand the base the business is built on.

Finally, we're avoiding any banners or signs screaming "75 PERCENT OFF!" Yes, we're using price to incentivize our best customers, but in a way that's more subtle and also sends the message that they're special and important, as they truly are. It gives us our best chance to minimize any long term damage to our price integrity.

In this time, when it's tough to get foot traffic into your store, and tougher still to get them to open their wallets, turning to your best customers gives you the best chance to convert your inventory backlogs into precious cash. It's also the least expensive way, from both a marketing and a markdown perspective. You've spent a lot of years developing your relationships with these loyal customers. Now is the time to turn to them.